Levine on Wall Street: Diet Shakes and Dodd-Frank

He sure is! It's like watching the buildup to a professional wrestling match. Here's Bloomberg News:

Ackman, head of Pershing Square Capital Management LP, said on Bloomberg Television that his firm has devoted $50 million of investors’ money to prove that Herbalife is a pyramid scheme. The results of the undercover investigation, which focuses on Herbalife’s nutrition clubs, will be released at a presentation today in New York.

“Trust me, when you see the stuff we have,” Ackman said in an interview on “Market Makers” with Stephanie Ruhle and Erik Schatzker, “you will conclude the money was well spent.” He suggested that the nutrition clubs -- part of Herbalife’s direct-selling approach -- resemble the fake trading rooms set up by Enron before accounting fraud led to that company’s bankruptcy in 2001.

“You’re going to learn why Herbalife is going to collapse,” he said on CNBC, acknowledging that “I’m raising expectations, but we won’t disappoint.”

Who talks like that? If I were a betting man I'd have been buying Herbalife yesterday, though I seem to be in the minority; it was down 11 percent on the day. Because Bill Ackman said that he wouldn't disappoint. He'd better not. Here is a roundup of previous Ackman Herbalife pronouncements.

One thing to think here is: Nobody is satisfied, but nobody could ever be satisfied with anything. The prospect of bailouts has been a part of banking since Bagehot. The point of banking is to conceal risk. If banks just proceeded along with no government backing, total transparency, no systemic importance, and purely market evaluation of risks, then we wouldn't need banks.

And the Volcker Rule?

Here is John Carney on a new paper about how the Volcker Rule has succeeded in reducing bank trading activity, but not bank risk. Why would that be? Carney:

According to the paper, banks have managed to maintain their risk-taking in two ways: they have reduced the hedging of their banking books and increased the speculative uses of trading assets not limited by the Volcker Rule. Those assets would include U.S. Treasurys.

I am not completely convinced by these explanations of the mechanics but there's probably some rough truth here: Speculative trading, or a commodities business, or whatever, probably does diversify a bank a little, and one result of Dodd-Frank generally has been to focus banks more on core competencies, at the cost of (risky but) diversifying activities. The benefit of that is that it's probably easier to let narrower, better capitalized, smaller banks fail than it is to let giant universal banks fail? No one seems to believe that.

Fidelity clients can buy Credit Suisse IPOs.

Fidelity and Credit Suisse struck a deal yesterday where Fidelity's retail brokerage clients can participate in initial public offerings and follow-ons run by Credit Suisse. One obvious question to ask is: Why doesn't this happen more often? Why can't all retail brokerage clients participate in all IPOs run by all banks? There are mechanical issues -- you have to divide up fees, and liabilities -- but they're obviously not insurmountable, since Fido and CS surmounted them. The answer probably has something to do with the fact that access to IPOs is one of the more valuable services that a brokerage can offer to attract customers, so most banks would prefer to compete for customers by offering them IPOs that no one else can get. Rather than competing for investment banking clients by offering them access to a huge retail buyer base.

All we know for certain is that some high frequency traders have made enormous profits that resemble economic rents. Virtu Financial, a major high frequency trader, disclosed in 2013 that, over the past five years, it only lost money on one day, and industry observers estimate that high frequency trading earns about $1 billion per year in just the United States.

Is that a lot? One claim is that there's about $33 trillion of stock traded in the U.S. each year, meaning that high-frequency traders make about three-tenths of one one-hundredth of one percent of each trade for providing their liquidity services. This is a lot less than old-school liquidity providers charged, though they make part of it up in volume. But you do probably need a "compared to what?" before you can get really mad about a bare number. Meanwhile JPMorgan is forming a 150-person group to tell clients how to execute their orders.

Who made money selling bonds to the Fed during QE?

Here's a Fed staff working paper about quantitative easing reverse auctions of Treasury bonds in 2010 and 2011, in which primary dealer banks competed to sell $780 billion of bonds to the Fed. The paper describes the auction mechanism, which allowed for a certain amount of cleverness insofar as the Fed used a model to compare prices across different bonds, so if you could figure out the model you could figure out the most profitable bonds to offer. Delightfully there's a league table, which is arguably a decent measure of cleverness:1

But the Fed should get points for cleverness too; it paid about $160 million above midpoint prices for $780 billion of bonds, or about 2 cents per $100, which isn't too bad.

1
I've truncated the table to fit, omitting columns on profitability to ask.

To contact the writer of this article: Matt Levine at mlevine51@bloomberg.net.

To contact the editor responsible for this article: Tobin Harshaw at tharshaw@bloomberg.net.

Matt Levine is a Bloomberg View columnist writing about Wall Street and the financial world. He is a former investment banker, mergers and acquisitions lawyer, and high school Latin teacher.
Read more.